Bank commodity hoarding to end?


Find below an excerpt from a fascinating Morgan Stanley study of the global supply of commodities by investment banks. Nice job if you can get it. Trade the commodity and control the supply. Rent-seeker 101.

The long-awaited unwinding of inventory financing and trading deals in LME metals appears to have begun, in our view. Ultimately, we expect a number of wash-back effects, the most important of which are likely to be renewed price pressure on aluminium and zinc, as well as second-order effects on some feedstock prices such as alumina. We think copper prices should escape any significant near-term pressure, but more ready access to metal over time could be negative as supply increases.

Recent developments driving change: The combination of the recent increase in regulatory scrutiny of Financial Holding Companies (FHC) participation in physical commodity businesses, changing LME rules on warehouse load-out rates, and rising global interest rates has focussed market attention on the possible demise of warehouse-based trades. This story has its roots in three developments since the Global Financial Crisis of 2008-09: 1) An extended period of very low interest rates and unconventional monetary policy via Quantitative Easing (QE); 2) the rapid consolidation of LME warehouse ownership and the subsequent geographic consolidation of metal in warehouses, and 3) increased regulatory oversight of FHCs in the US following bank failures and the injection of large amounts of taxpayers’ money in 2008 amid increased concern about systemic risks to the banking system.

Origins in the Global Financial Crisis
To appreciate the significance of changes that are under way, it is worth recalling that the factors now heralding important changes in the physical metals trade and warehousing businesses of the LME have a common origin in the Global Financial Crisis of 2008-09.

As the LME Board itself noted in May 2011 in response to the report and recommendations of the Warehouse Study by Europe Economics, in 2009 the North American aluminium industry was facing a major recession with the apparent collapse of major automotive customers. “At that time the concerns of the industry were all centred on the need to deliver material into a warehouse, with dire warnings about the consequences for the LME should there be a capacity constraint that affected the free flow of surplus metal onto warrant. We now find that the major concern of that same industry (and in some cases the same participants) is the ability to take material out of warehouse. We also note that the situation has been exacerbated by the coincidental availability of surplus aluminium with the widespread policy of central banks holding down interest rates and creating a pool of cheap money that increases the attractiveness of financing deals and in turn increases the pressure for fiscally motivated stock movements.”

Warehouse ownership the key
While the LME’s assessment of the origins of the problem of lengthening exit queues and their impact on the aluminium market addressed many important aspects of this issue, a notable and persistent omission from their analysis has been a consideration of the impact of warehouse consolidation on the growing problem of lengthening load-out times. Yet this
problem of lengthening warehouse queues and elevated premium structures has emerged as part of far-reaching changes in the ownership, control and distribution of the LME warehousing business.

Most important in this respect have been the material diminution of independent warehouse ownership since 2010 and the resultant significant concentration of warehousing business in the hands of banks and larger trading houses. This development also had its roots in the global financial crisis when JP Morgan Chase acquired the physical commodity
assets of Bear Stearns in 2008 and in 2009-10 the warehousing and physical commodity trading assets of RBS Sempra under the brand name of Henry Bath & Co. While significant in the context of today’s heightened regulatory oversight of FHCs, the real trigger event for LME warehouse consolidation appears to have been Goldman Sachs’ acquisition of Metro International Trade Services LLC, a leading global warehouse operator specializing in the storage of non-ferrous metals for the LME. Incidentally, Metro was also the largest warehouse owner in Detroit, and effectively dominated this LME good delivery point at the time of the surge in demand for warehouse space in 2009.

As has subsequently become clear, domination of a good delivery point through the ownership of the majority of multiple warehouse units licensed to receive a particular metal in a given location is a necessary condition for controlling metal inflow, outflow and associated rental cash flow that is the foundation of warehouse rental and financing deals. In addition, a sizeable balance sheet and an active involvement in physical trading as a means of engaging in inventory finance or warehouse incentive deals became a sufficient condition of this domination.

Not surprisingly, the lessons and opportunities provided by the Metro acquisition were not lost on the big physical commodity trading houses, which, in a short space of time from March 2010 onwards, bought the majority of the remaining independent LME warehousing businesses. The most important of these acquisitions were Glencore Xstrata’s purchase of the Pacorini Group, Trafigura’s acquisition of North European Marine Services (NEMS), the Noble Group’s
purchase of World Wide Warehouse Solutions (WWS) and Louis Dreyfus Commodities’ acquisition of GKE.

Because of these ownership changes and a small number of subsequent deals, “the number of independent LME warehousing companies has accordingly steadily declined to around 35 per cent of the total as of July 2013,” according to Thomson Reuters. In this process, with the notable exception of the C.Steinweg Group, most of the remaining independent LME warehouse companies have become small and location-specific operations.

Concentration of metals storage space
However, changes in the LME warehousing business were not confined to ownership alone. The emergence of bank- and trading house-owned warehousing and logistics businesses subsequently triggered a simultaneous expansion of licensed warehouse units that magnified the effects of the ownership changes that had taken place in 2010. According to Thomson Reuters, the number of LME-registered warehouse units increased from 584 in March 2010 to 678 in mid-July 2013. The current level of registered units is actually slightly below the absolute peak of this development, which was in August 2012 at 689 units.

In this process, not only have warehouse units controlled by small independent companies continued to decline relatively and absolutely, but also there has been a growing concentration of locations with an increasing number of units controlled by banks and warehousing companies. The increase in bank- and trading company-owned and -controlled warehouse units has largely been in five notable LME good-delivery points: Detroit and New Orleans in the US, Antwerp and Vlissingen in Europe, and Johor in Malaysia.


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  1. migtronixMEMBER

    How could anyone expect anything different? When governments get in the job of picking winners and losers the winners will start to act like governments – after all they basically are govts at that point. What does acting like a government mean? Taking monopoly positions in everything and rent-seeking to their hearts content.

    I’ve had a standing “disagreement” with the Legislature of the State of Victoria where I ask them to provide justification as to why the Vic Roads corporation (and it blatantly is called that in the legislation) is given a monopoly over the registration of vehicles – since long standing common law principles and actual British Imperial law (which is still extant) strictly prohibits government mandated monopolies? Do you think I’ve ever been given a satisfactory answer? Do you think a court has ever upheld my complaint?

    • Competition is all about establishing one’s monopoly. This is the fundamental contradiction of market economy competition (simple dialectic) which when not understood, leads to this kinds of nonsenses: private monopolies supported or created by government when the government has the responsibility to insure that such a monopoly could never arise in an economy.

      The next step of a private monopoly is to take over the political power and to establish a political monopoly.

      Those kinds of principles are not taught in economics, because economics doesn’t anything to do with political economy, which is 19 century bull s***, when economics is “the very science”.

  2. Nice to see it talked about and somewhat obvious in hindsight.

    Investment banks have always loaned money to others to let them buy the things the investment banks don’t want, and loaned money to themselves to buy things they can manipulate and make more money from.

    Putting a gate (that you own) on the flow of anything in demand is the holy grail of investment banking

    • migtronixMEMBER

      Absolutely! Since the time of Thales of Miletus its been know that if you take a monopoly position (on say olive oil presses during the off season) you can charge whatever you want. That’s why so much of western jurisprudence was set up precisely to stop monopolies and cartels from gouging the general population. Sadly it doesn’t work that way anymore

  3. What’s the difference between Barclays and say Origin Energy? Both can buy and sell physical products and financial positions on those markets. Barclays got done for buying and selling physical electricity to benefit a swap position. What’s to stop Origin from doing the same? I’d be flabbergasted if there wasn’t electricity market manipulation here, by non-investment banks. Maybe the issue isn’t investment banks but market design?

    • Exactly, but investment banks and banks in general, have already a monopoly position on every market, that is why they can manipulate the governments too and take over the national sovereignty.

    • migtronixMEMBER

      There is no difference, Barclays was just doing what Enron did before it.

      Its the “regulators” who are complicit in this tort

      • I think market power is the issue.

        According to a fairly reliable source, Australian regulators are not as close to industry as they are in America. Pros and cons to that but I think more pros.

        Key to market integrity will be ability of police to enforce market rules.

        Interesting that JP Morgan is getting out of this racket after copping it from the Feds.

  4. For those that are interested, ive written some background on this topic @ I dont think changing the load-out rules changes the game for carry trades on metals, metal being stuck in queues only affects the economics of these trades to the extent it affects the forward curve…..